FT: Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

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Totally misguided regarding public purpose.

For one thing, the shareholders of the agencies are still there for ‘market discipline’ – all that’s been done for them is eliminated liquidity issues, not solvency issues.

At the end of the day a lot of houses were built for a lot of people who live there.

These are real assets and real standards of living that have been supported.

Is anyone arguing it’s a waste of real resources? That’s the real issue.

Also, fiscal policy is all about demand management, not a ‘pretty’ balance sheet by some arbitrary standard.

And, of course, without the fundamental understanding that the funds to pay taxes and buy government securities comes from government spending policy is likely to be suboptimal at best.

Also, note the bias towards ‘inflation’ that’s built into the political process.

This all supports prices and GDP.

There are no supply side constraints on government spending and/or lending with floating fx, unlike the gold standard of 1907/1930, and other fixed fx regimes, past and present.

Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

by Willem Buiter

Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.